Schemes of arrangement: sidestepping the class composition fight

Justice Brereton’s recent decision in HMA International Ltd [2026] NSWSC 401 (HMA International) endorses two separate but interconnected schemes of arrangement for holders of the same class of ordinary shares who receive different consideration. The structure provides a practical workaround to the uncertainty of class composition and will interest private equity sponsors and others structuring transactions with rolling shareholders.

The class composition problem 

Disputes about class composition have long created uncertainty in scheme transactions, where holders of shares with the same underlying rights will be treated differently under a proposed control transaction. This raises the question of whether those groups constitute separate classes for voting purposes, and where the boundary lies. Resolution can bring significant cost and delay risk.

The established test for identifying a ‘class of members’ asks whether members’ rights under the proposed scheme are sufficiently similar that they can consult together with a view to their common interest (formulated by Bowen LJ in Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 at 583; applied in Australia from Re NRMA Ltd (No 1) (2003) 44 ACSR 342 at [14]). The inquiry turns on the rights released or varied under the scheme and the new rights conferred by it, not on any pre-scheme attribute of the members or their securities (see Re Hawk Insurance Co Ltd [2001] EWCA Civ 241). 

Courts have recognised that shareholders holding the same class of shares may vote in separate classes where they are offered different consideration, e.g. cash v scrip rollover (see Re QMS Media Ltd [2019] FCA 2172 at [80]; Re Unity Group Ltd [2022] FCA 671 at [27]–[29]). However, those transactions deal with two classes of members under one scheme, meaning the Court still has to interrogate the precise boundary between groups of shareholders who hold identical underlying securities.

The uncertainty has also forced parties to entrench differential shareholder rights outside the scheme through such devices as shareholder agreements, adding further complexity and conditionality risk.

A structural change: sidestepping the class issue 

In HMA International, rather than proposing a single scheme with two classes, the proponents structured the transaction through two separate but inter-conditional schemes:

• a Management Scheme under which certain shareholders can elect between cash, scrip or a combination; and

• an Ordinary Scheme under which all remaining shareholders will receive cash consideration only. 

The structure avoids the delay and litigation risk of requiring the court to determine whether management shareholders and ordinary shareholders fall into the same or different classes. Each class considers and votes on the scheme that applies to it. There is no contested boundary to adjudicate.

Brereton J noted that the schemes provisions in the Corporations Act 2001 (Cth) are intended to have a "flexible operation” (at [33]). His Honour emphasised the advantages of the inter-conditional two-scheme structure, which: “ensures that each cohort is able to appreciate the implications of the schemes and vote in light of that understanding, and provides a simplified way to treat these cohorts... It does so without the need to engage in a detailed analysis of class composition. I accept that the approach helps to facilitate focus on whether each scheme is appropriate by reference to a clear and defined cohort of shareholders, rather than seeking to interrogate the boundary between two classes of shareholders within the one scheme” (at [32]).

The Court was satisfied that the two-scheme approach produced no unfairness to either group, and produced an outcome that was the same as if both classes existed in a single scheme, namely: 

• each class has full visibility of the other scheme through a unitary scheme booklet; and

• neither scheme proceeds unless both are approved. 

The structural advantage is that no one (court, target, bidder or shareholder) has to draw the class boundary in the traditional way within a single scheme. Instead, the class boundary is drawn by the separate schemes. That is a meaningful reduction in execution risk for any party contemplating a scheme in which different groups of shareholders are offered different consideration.

When a single scheme remains the better course

The two-scheme structure is not always the right answer. Where the class boundary is clear and uncontroversial, a single scheme with two classes remains the simpler course. The two-scheme structure adds documentary overhead and inter-conditionality risk: if one scheme fails, both do. Where the cohort receiving differential treatment is small, that overhead may not be justified. The structure is best reserved for transactions where the class boundary would otherwise be genuinely contested: where shareholders hold the same legal rights but receive different consideration.

Key takeaways

The practical lesson from HMA International is that, where a scheme involves multiple groups of shareholders who hold the same legal rights but will be treated differently under the transaction, two inter-conditional schemes offer a clearer structural path than a single scheme with contested class composition.

Part 5.1 of the Corporations Act 2001 (Cth) is flexible enough to accommodate the structure without sacrificing transparency for shareholders. For sponsors and advisers structuring rolling-shareholder transactions, HMA International offers a workable precedent.